To process the sale correctly, the first step is to work out the cost base, then the proceeds and then calculate the capital gains in terms of that cost base, remembering that market substitution rules apply.

“If you acquire something for less than market value, the cost base is actually going to need to be recorded as its market value, not what you paid for it and that might affect your cost base if you go through that normal process of calculating capital gains.”

“However, where you have non-arm's length issues, you have to consider TD2024/5. This is not a big document, it's an extension that highlights how NALI and capital gains may interact.”

If the fund is not working on an arm’s length basis, NALI will apply in a number of circumstances.

“The first one is if the amount of the capital gain is greater, that is if you sell an asset for more than its market value, or if in gaining or producing the capital gain, there's been a non-arm’s length expenditure incurred, including in respect of the acquisition of that CGT,” Cullen said.

“What you’re looking at here is that you have got your capital gains determinations under 102-5 of the Income Tax Assessment Act, and then you have statutory income being the capital gains. There are a couple of other paragraphs that you need to think about.

“Paragraph eight states that ‘the amount of the NALI is determined by reference to the amount of the non-arm’s length capital gain being that capital proceeds less the cost base arising from the scheme’ and ‘is reduced by any attributable deductions in calculating that non-arm's length component’.”

In the ruling, applying capital losses or discounts does not amount to attributable deductions, but is a step in determining net capital gains.

“The important thing here is that the ATO’s view is that the NALI is the capital proceeds less the cost base. This has caused some concern, and I know the SMSF Association is raising this with the ATO, the idea that non-arm's length capital gains may impact on the arm's length capital gains,” Cullen said.

“Additionally, paragraph nine of the ruling states that the amount of the statutory non-arm's length income cannot exceed the superannuation fund's net capital gain. The two paragraphs are differentiating between the gross capital gain and the net capital gain and that is an important element when considering how CGT and NALI interact.”